Loss Gravitas

The Hamburg plant is closing June 8, 2010 and 126 people (white & blue collar) will be let go. They will be released into the Michigan unemployment ranks in one of the toughest job markets our state has seen for a long time. This is another bellwether event for our state and our union: a plant, after existing for 40+ years of prosperity, has lost its way. Design engineers, manufacturing engineers, quality engineers, managers, administrative clerics, CNC operators, supervisors, human resource personnel, maintenance managers & technicians, mothers, fathers, daughters, sons, et al, will be unemployed. There were over 240 people that worked at this plant as little as 2 years ago and that is a more accurate number of people unemployed as a result of this closing.

The employees of this plant are productive members of society. These people exemplify what hard work in our American factories and markets mean to the health of our society as a whole. There was never a time when there wasn’t a struggle at the Hamburg plant, but as I have said about markets and life before, there is always a struggle. But, this time it’s different. This time, the struggle will end for this plant that has seen 20% margins for decades.

Why did the plant die? What are the internal and external factors that rang the death knell for this plant? Our markets today are subjected to a confluence of events that make it impossible to name one cause to any one event. We have to look at the prevailing head winds facing our manufacturing industry in America and our economy in general to understand the basic root causes. That is to say, things like the export of labor to “low cost” nations. And, the global purchasing strategies of our global business models that leverage the lowest possible price for any and all components in any given bill of materials.

With the navigation systems of today and the technological advances of sea vessels, any port city in this world is just as competitive to source a component as any other city. The principles of 18th century economics are just as sound in this regard as they were hundreds of years ago. But, when you add in instantaneous world communications and ERP systems that automatically calculate long lead planning, you can warp the principles of division of labor economics quickly if you are to operate in an unethical or imprudent manner. Therefore, if our legislature is poisoned or inept to the point that it doesn’t create the laws we need to protect our markets from short sighted CEO’s who are more focused on their own self interest, those short sighted CEO’s could give away the wealth of our nation.

In simpler terms than the last paragraph, we must protect our industrial capital and proletariat with protectionist legislation while at the same time using free market principles. I know these things sound contrary to each other, but lets look at the Hamburg plant a little closer so you may see what I”m talking about. Please read the following satirical story that highlights the chronology of the plant’s life cycle. I wish to make very clear that the “bad guys” in the satire that follows are not representative of any one person from the corporation being poked fun of. The events that have led to today took place over the course of many years.

The Hamburg plant makes exhaust pipes. To keep this example simple, lets look at the three most predominant raw materials used to make exhaust pipes: tubing, flanges, and weld wire. Consider that the primary market for vehicles is the USA. Consider also that free market principles have taught us that you should always go after the lowest prices.

Well, in the earlier days of the plant, pretty much all the raw material was sourced through the USA. Therefore, people in other geographic locations, but still living in the USA, had jobs where they specialized in making tubing, flanges, and weld wire. Because they had jobs, they also had pay checks they could use to buy a new vehicle which is the finished goods product that these exhaust pipes go into. The people that lived around those plants could sell the factory workers lunch or dry cleaning services or any other thing a person might need. Try to envision a very durable and strong fabric as an analogy to our supply chain here: all of these single strands of thread are not much on their own, but weave them together tight and thick and you have a strong fabric. This fabric is akin to the health of our overall all economy.

As the years went by and the people at the Hamburg plant perfected their machinery and processes and embraced the free market principles and division of labor principles, they prospered. The division of labor principles worked! Just like Adam Smith said they would.

Then this fancy, sophisticated, and super-savvy traveler guy became the CEO of the company; let’s call him Neutron Jack. He’s really smart and he’s been to Brazil, China, India, and all corners of the globe. He knows some people in India that make flanges just like the ones the Hamburg plant could really use. And, he says they can make them a lot cheaper. But they’re half way around the world you say, what about the transportation costs? Well, India has miles and miles of sea access and so does Detroit and ocean freight is cheap he says, we’ll just take into account the long lead times and this is going to save us a ton of money. Then someone else pipes up and says but what about the machinery and expertise over there in India, how can they compete with our quality? No problem says Neutron Jack, we’ll get them our best equipment, send our best people over to train them, and they’ll be able to take advantage of everything our men and women have spent years perfecting. Hooray! says the group at HQ, we should give ourselves bonuses for our forward thinking.

Meanwhile, somewhere in Kentucky, a plant that has river access, rail access, and also highway access that makes flanges has to close it’s doors because it can’t compete with the prices in India. But, our fabric is still pretty strong, so they’ll be okay. Of course, the people laid off might not be able to afford a car now, but it’s not like they’re dead right? I mean, everything will work out for them. They’re lucky enough to live in the best country in the world with the smartest and most ethical congressmen and business executives.

High on the success of his latest great achievement, Neutron Jack is having some more great ideas. He was up at his lake house getting ready to take out his yacht and he had this monumental idea: what about the steel tubing? Steel tubing has got to be by far the most expensive component. The steel tubing accounts for nearly 45% of total costs of the exhaust pipes. What if Jack could get the tubing sourced to a lower cost country. Being that Jack knows people from all over the world, he has his purchasing guys secure a new sourcing contract for steel tubing from South Korea. These guys in South Korea have excellent quality, low prices, and access to ocean freight. They ink this deal and now they’re going to save a ton more money. Hamburg is going be able to cut their material costs significantly and still charge the same prices to their customer, because I mean, the customer doesn’t need to know about these savings, right? This extra margin belongs in Neutron Jack’s pocket because he’s the one who was so smart to think of this latest and most brilliant idea right?

What a smashing success this last move turns out to be. Neutron Jack and his team have really made some progress now. They’ve managed to cut costs and increase profits with just a few simple moves. They are very happy and decide to give themselves a bigger bonus this year because they had to work really hard to make these fantastic deals happen. Their cell phone bills can prove how much time they’ve been working and their families can attest to the fact that they never see mommy or daddy anymore because all they do is work. They really do deserve their bonuses this year. With these bonuses they’ll be able to buy lots of Christmas presents for their kids to make up for the fact they never get to see them anymore because of all the hard work they’ve been doing. I mean, that bonus money goes right back into the economy right? That’s gotta be a good thing.

Meanwhile, a tubing manufacturer in Chicago will be closing its doors for the last time. They had a good run, but they keep losing orders and have reached a point where they can’t cover their operating expenses any longer. It was a sad day when they called their steel vendor in Pennsylvania to let them know because their orders are down too. The steel plant that provides the steel to Chicago is on the ropes too. They’ve lost business now to their tubing customer in Chicago and their flange customer in Kentucky. But, business is business and we can’t let those bleeding hearts deter us from doing what’s best for the free market you know. It’s sad that some more folks will be released into the ranks of unemployment, but they should be okay. They do have the benefit of living in the greatest country on the planet with the very smartest business executives and politicians. The laid off workers might not be able to afford a car right now, but they’ll bounce back, they always do.

Neutron Jack is now dealt with some sour news: the newspapers and cable news networks have released some less than glamorous figures. It turns out the auto markets are sagging. It also turns out the light truck market is connected to the housing market and there were some crooked dealings going down on Wall Street. Those bastards on Wall Street weren’t operating with the same “high ethical standards” as Neutron Jack. Now that the housing market is a bust, it’s going to kill the light truck market. The far east supply chain is also getting pretty good at making vehicles and they’re making their own cars and car parts now; that’s also cutting into the market. Some how, and I can’t imagine how, they’ve acquired the capital and know-how to make cars and car parts as good or better than we do for a lower cost. It’s almost as if by magic they’ve figured out how to produce all these things with no previous experience or learning curve. There is also some complaining from the plant’s accountants that they’ve been getting creamed by unanticipated air freight to expedite parts from India because the quality is so piss poor that they won’t be able to ship the parts to their customer. The shop floor guys have been spending some extra time and effort to get the parts up to spec by grinding and sanding them, but some of the parts are so shitty they’re useless. The plant controller has told HQ that the costs are actually higher than when the plant was sourced through the US supply chain. The controller keeps complaining about something called “the cost of poor quality” or something like that.

Neutron Jack calls in his best minds to discuss how to approach this new crisis. He explains that somehow the market is shrinking and even though they’ve managed to brilliantly cut costs they’re about to get shellacked according to the latest consumer purchasing forecasts and some freight & quality costs that weren’t accounted for in their original power point slides. They’re going to have to act quickly if they’re to avert this latest crisis. Neutron Jack announces that no one is going to leave the conference room until they’re able to reach a solution that can get them out of this unfortunate situation they’re in that isn’t connected to their own actions over the last few years whatsoever.

After hours of debate and power point slides, it’s decided that they can file for chapter 11 and reorganize the company’s debt. This will absolve the company of these crushing fixed costs and allow them to jettison some of these dead weight plants that are just dragging them down. The decision is made to close the Hamburg plant along with a handful of others. Someone pipes up “But Jack, what about the folks at our plants that have been working for the company for so long?”. Jack says that we’ll have to break this to them in a way that lets them know how thankful we are for their service. I mean, after all, these confounding market conditions are completely separate from any decisions that have been made by this group of people. We’re exalted and absolved from any semblance of connectivity to the problems we face. This is a market issue after all, the company has done nothing wrong.

After the announcements of the bankruptcy and plant closings, our team of executives is stressed to the max. This has been a trying year and our team is reeling after another 12 months away from their families and “putting out fires”. With the quick exit from bankruptcy, the plant closing announcements done, and shedding of mass amounts of debt, the team agrees that they really deserve some big bonuses this year. They’ll be able to buy some nicer Christmas presents this year to make up for more estrangement from their children. And, after all, that money is going back into the economy, so that’s gotta be a good thing. Right?

Now obviously, I’ve peppered that story with satire. But, in a round about way, it’s all true. And, here’s the kicker: this is only a microcosm of our economy today. And, please don’t miss the point and think that I’m against a free market approach. I’m not against world trade and I understand that part of the equation has to do with more people around the world involved in the competition and it’s healthy to expand internationally thus improving the plight of our world’s citizenry. My point is about ethics and ineptitude. Each time one of Neutron Jack’s decisions was short-sighted or unethical, it resulted in doors closing and people out of work in the USA. It was akin to another little tear in our “fabric” analogy. What I’m trying to showcase is that our industrial capital and know-how is being pillaged and given away thus breaking with the true concept of a free market . I’m a firm believer in Adam Smith’s foundational principles of economics. Adam, however, wrote another less read book about ethics called The Theory of Moral Sentiments. In fact our father of modern capitalism was well aware of the social connectivity to the morality of our economic decisions. In fact, many people have a hard time (i.e. authoritarians) reconciling these capitalistic principles with social morality. And, even though Adam’s assumptions in this example cannot take into account things like computers and telephones (because they hadn’t been invented) they would have still held up if what? ANSWER: Jack didn’t give away the industrial capital, know-how, and act unethically and inept. I believe Adam would have called Neutron Jack a fool.

My main point is that as a country, we can’t allow the Neutron Jacks of the world sell out our industrial capital or know-how just to screw over our own proletariat and line the pockets of a few. There are thousands upon thousands of Neutron Jacks out there in the USA, but there hundreds of wage laborers for each Neutron Jack. We know that there are thousands of Neutron Jacks because he wrote a book about how smart he was and it was a best seller. It only takes common sense to know that the math of Jack is whack if we give away our wealth to the benefit of a few at the expense of the many. It really just boils down to ethics and aptitude.

Think of this as another analogy: You have a really popular restaurant/night club that everybody wants to get into. Every night, there is large group of people that want to get in and they don’t take reservations so it’s first come first served. The scene out front is chaos every night. It causes people much aggravation and disappointment. So, someone thinks of a great idea: waiting line dividers. If you place them in a long zig-zagging fashion, you can allow everyone to be grouped in an equitable formation so that everyone fits, there is no more question as to who got there first, and the problem is solved. Those that want to get in first will have to work a little harder to arrive earlier. The key to the system is that people have to honor each other, be civilised, and wait their turn. If the people were savages, they could easily disfigure the dividers or fight their way to the front.

One clever individual, we’ll call him Neutron Jack again, finds a hidden door in the back of the building. He’s able to show up whenever he wants, avoid the line, and sneak right in the back door. He kind of cheated, but he’s only one person and the other people won’t suffer that much for his transgression.

This secret is just too good for Jack to keep to himself. He’s got to share it by telling a couple of close friends. So a few more people start circumventing the line out front and getting in the back door too. Now the people out front that played by the rules are starting to feel it a little bit more. It seems like the line isn’t moving as fast as it used to. It’s still moving, but something seems wrong. The wait times are starting to increase for a reason unknown to them.

Jack’s friends want to share their secret with a couple more of their friends. Now there’s a significant percentage of people that want in the back door. But all of the sudden, the door is becoming less and less secret. In fact, the same mess that used to be out front when the restaurant opened is starting to appear in the back of the building.

Some of the people out front still don’t know about the secret door, but they know something rotten is going on because the line wait times are definitely out of whack. What used to take under an hour is now taking up to two and three hours. That’s when they figure out that Neutron Jack’s brilliant little secret was nothing more than Jack cheating and screwing over his fellow patrons.

While the waiting line dividers were in effect, everything moved uniformly and in an equitable fashion. When people started to cheat and compromise their ethics, the whole system broke down and resulted in not just longer wait times than before, but the resentment and distrust between the restaurant patrons that could not so easily be fixed. The system didn’t break down for any other reason than compromised ethics.

I believe this analogy is appropriate for our economy today and one of the reasons we’ve lost our way. It’s really all about ethics. If people act ethically and protect the markets that sustain them, we will be okay. If we don’t act ethically and strive to increase our aptitude, we shall surely face some hard times in our near future.